The rupee rose by 40 paise to touch a one-month high of 54.14 against the US dollar on hopes of strong fund flows, after BSP chief Mayawati decided to lend her party's support to government on FDI issue in the Rajya Sabha.
Forex dealers said firm local equities, signs of consistent capital inflows and sustained dollar selling by exporters also boosted the rupee sentiment.
The rupee swung between 54.04 and 54.58 during the day at the Interbank Foreign Exchange (Forex) market.
However, recovery in stocks after the news of support by BSP Chief Mayawati on FDI issue to the government helped the rupee to bounce back and end the day at at 54.14, a rise of 40 paise, or 0.73 per cent.
This is the highest level of rupee since November 2 when it had closed at 53.81.
Meanwhile, the BSE benchmark Sensex rose by almost 95 points to 19,186.24.
"The only major factor that boosted rupee today was BSP's support to the government on allowing foreign direct investment (FDI) in the multi-brand retail. Investors cheered the prospects of higher foreign capital inflows on this news," Dhanlaxmi Bank Executive Vice-President Srinivasa Raghavan said.
Foreign Institutional Investors (FIIs) infused USD 175.41 million in the stock markets yesterday, as per Sebi data.
The dollar index was down by a mere 0.008 per cent against a basket of six major currencies.
"The sharp appreciation in the rupee was seen after BSP's Chief Mayawati (BSP) came in and said she will support the FDI in retail in Rajya Sabha. This further boosted the positive sentiments in the market and made the rupee gain against the US dollar. ," said Abhishek Goenka, founder and CEO, India Forex Advisors.
The premium for the forward dollar closed lower on fresh receipts by exporters.
The benchmark six-month forward dollar premium payable in May declined to 168-169-1/2 paise from Wednesday's close of 171-172 paise.
Far-forward contracts maturing in November also eased to 316-1/2-318-1/2 paise from 317-1/2-319-1/2 paise.
The RBI has fixed the reference rate for the US dollar at 54.4650 and for euro at 71.1150.
The rupee advanced further against the pound sterling to 87.21 from previous close of 87.85 and remained firm to end at 70.75 per euro from 71.39.
It also hardened against the Japanese yen to 65.72 per 100 yen from last close of 66.36.